Occasionally as I’m screening stocks using the screener in FINVIZ I’ll come across a stock that attracts my attention. I love using the FINVIZ screener because I can screen for literally hundreds of conditions in just a few minutes. On one such occasion I noticed a company named Prospect Capital Corporation (Stock Symbol PSEC). I can’t remember if I was interested in stocks that had a high dividend yield or stocks that paid monthly, but the more times I screened for similar attributes, the more often Prospect Capital made the list.
Prospect Capital can be found in the Financial Sector of the Market and is generally referred to as an Asset Manager. Even more specifically I discovered it to be a Business Development Company (BDC). A BDC is a publicly traded company that invests in small upcoming businesses, both public and private. BDCs were created by Congress in 1980 and are usually taxed as Regulated Investment Companies (RIC). As long as the RIC meets certain income, diversity, and distribution requirements the company pays little or no corporate income taxes. RICs, BDCs and REITs must pass along approximately 90% of income as dividends to shareholders to maintain their tax status. These dividends are then taxed at the individual shareholder level when the individual files his tax returns.
According to Prospect Capital Corporation’s own website...
“Prospect Capital Corporation (PSEC) is a leading provider of flexible private debt and equity capital to sponsor-owned and non-sponsor-owned middle market companies in the US and Canada.... PSEC invests primarily in first lien and second lien senior loans and mezzanine debt, which in some cases include an equity component. We provide capital to middle market companies and private equity financial sponsors for refinancings, leveraged buyouts, acquisitions, recapitalizations, later stage growth investments, and capital expenditures. PSEC’s portfolio is diversified across a wide variety of industries, including manufacturing, industrials, energy, business services, financial services, food, healthcare, and media, as well as many other sectors. PSEC also invests in the equity and subordinated debt tranches of collateralized loan obligations (CLOs). Our investment objective is to generate both current income and long term capital appreciation through debt and equity investments. We seek to maximize returns and protect risk for our investors by applying rigorous credit analysis to make and monitor our investments. PSEC is a yield oriented investor and has paid a continuous, regular dividend to its investors since inception.”
To say the least I was intrigued. The more I looked into this company the more I liked it. It didn’t fit into my usual parameters for discovering a great stock but I was intrigued by the fact that it paid approximately 12% in dividends and it had sufficient earnings to support those dividends. The company itself wasn’t growing because all it’s earnings were being distributed to it’s shareholders but based upon its declared earnings it appeared to be able to maintain or slightly increase those earnings over time. On top of all of this I also discovered that the company pays its dividends monthly.
Companies like this probably will not increase in value over time but the dividends generated will produce a very nice income stream that will create a lot of worth over time (think compound interest). This stock was distributing 11 cents per month on a stock whose price waivered around $11. And this stock was actually increasing its dividend ever so slightly every single month.
I have now owned stock in this company for a few years and so far it has not disappointed me. It distributes a dividend every month just like clockwork (around the 20th of the month) and hasn’t missed a single month yet. This has been consistent and a welcomed addition to my portfolio.
But “yet” is the key to this investment. A stock like this is high maintenance. I have to watch this company like a hawk to ensure everything continues without a flaw. This stock, as all BDCs, has very little growth potential that I can ascertain and any disruption to its dividend would be disasterous for the price of the stock and my financial health.
I have enjoyed owning this stock and I will continue to hold this stock as long as the dividends continue because these dividends, like dividends from any of my holdings, are the engines that fuel my portfolio.
Remember to do your own research and good luck trading.
Prospect Capital can be found in the Financial Sector of the Market and is generally referred to as an Asset Manager. Even more specifically I discovered it to be a Business Development Company (BDC). A BDC is a publicly traded company that invests in small upcoming businesses, both public and private. BDCs were created by Congress in 1980 and are usually taxed as Regulated Investment Companies (RIC). As long as the RIC meets certain income, diversity, and distribution requirements the company pays little or no corporate income taxes. RICs, BDCs and REITs must pass along approximately 90% of income as dividends to shareholders to maintain their tax status. These dividends are then taxed at the individual shareholder level when the individual files his tax returns.
According to Prospect Capital Corporation’s own website...
“Prospect Capital Corporation (PSEC) is a leading provider of flexible private debt and equity capital to sponsor-owned and non-sponsor-owned middle market companies in the US and Canada.... PSEC invests primarily in first lien and second lien senior loans and mezzanine debt, which in some cases include an equity component. We provide capital to middle market companies and private equity financial sponsors for refinancings, leveraged buyouts, acquisitions, recapitalizations, later stage growth investments, and capital expenditures. PSEC’s portfolio is diversified across a wide variety of industries, including manufacturing, industrials, energy, business services, financial services, food, healthcare, and media, as well as many other sectors. PSEC also invests in the equity and subordinated debt tranches of collateralized loan obligations (CLOs). Our investment objective is to generate both current income and long term capital appreciation through debt and equity investments. We seek to maximize returns and protect risk for our investors by applying rigorous credit analysis to make and monitor our investments. PSEC is a yield oriented investor and has paid a continuous, regular dividend to its investors since inception.”
To say the least I was intrigued. The more I looked into this company the more I liked it. It didn’t fit into my usual parameters for discovering a great stock but I was intrigued by the fact that it paid approximately 12% in dividends and it had sufficient earnings to support those dividends. The company itself wasn’t growing because all it’s earnings were being distributed to it’s shareholders but based upon its declared earnings it appeared to be able to maintain or slightly increase those earnings over time. On top of all of this I also discovered that the company pays its dividends monthly.
Companies like this probably will not increase in value over time but the dividends generated will produce a very nice income stream that will create a lot of worth over time (think compound interest). This stock was distributing 11 cents per month on a stock whose price waivered around $11. And this stock was actually increasing its dividend ever so slightly every single month.
I have now owned stock in this company for a few years and so far it has not disappointed me. It distributes a dividend every month just like clockwork (around the 20th of the month) and hasn’t missed a single month yet. This has been consistent and a welcomed addition to my portfolio.
But “yet” is the key to this investment. A stock like this is high maintenance. I have to watch this company like a hawk to ensure everything continues without a flaw. This stock, as all BDCs, has very little growth potential that I can ascertain and any disruption to its dividend would be disasterous for the price of the stock and my financial health.
I have enjoyed owning this stock and I will continue to hold this stock as long as the dividends continue because these dividends, like dividends from any of my holdings, are the engines that fuel my portfolio.
Remember to do your own research and good luck trading.
PSEC Chart as of 30 Aug 2013.
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